Appetite growing for jumbo loans

Bargain hunters may still rule the market, but high-end real estate is gaining momentum, and many lenders are looking to take advantage.
After years of slimming down, banks in southern New England and across the country are regaining their appetite for “jumbo” home loans, the large mortgages on expensive properties that carry higher risks and rewards than conventional loans.
In the first half of 2012, banks lent $72 billion nationally in jumbo mortgages, a 36 percent increase from the first half of 2011, according to estimates from industry researcher Inside Mortgage Finance. Jumbo lending also rose 6 percent in the second quarter of this year from the first quarter.
Enthusiasm for high-value loans, which typically cannot be sold to the federal government, appears to be highest among the large national banks. In the first half of this year, Wells Fargo, the top jumbo lender, more than doubled the amount it put into large loans in the first half of 2011, according to Inside Mortgage Finance. Wells Fargo made $20.5 billion in large loans in the first six months of the year, $12.9 billion more than Bank of America, which produced the second-highest total.
The largest mortgage lender in Rhode Island, Bank of America has made a push to bring in more jumbos and so far in 2012, high-value loans make up 25 percent of new originations nationally, compared with 10 percent in 2011, according to bank spokesman Terry Francisco. Although the bank doesn’t release regional or state-by-state figures, he said the figures were likely representative of New England.
Most of that new jumbo activity, about 80 percent, is in refinances, Francisco said, as homeowners look to take advantage of historically low rates and attractive, new jumbo products that reflect them.
“Most of them are refinances, and that is typical of most lenders today, but we do have a focused effort to bring in more jumbos and expect to do so as the housing market recovers,” Francisco said. “We offer discounts in pricing for [jumbo] customers who have a relationship with Bank of America.”
As an example of those discounts, Bank of America is offering customers with $250,000 in the bank a 50-basis-point reduction in discount points on a jumbo loan.
Some local banks are also diving into more large loans, partly because sales of large and luxury homes have been picking up this year along with the rest of the real estate market. Waterbury, Conn.-based Webster Bank’s jumbo loans in Rhode Island and southeastern Massachusetts increased 10 percent so far in 2012 compared with the same period last year, spokeswoman Brenda Green said. Jumbos now make up 15 percent of Webster Bank’s mortgage portfolio in Rhode Island and southeastern Massachusetts.
Green said Webster has just launched an initiative aimed at jumbos, but the jump in lending “is more an indication of the [real estate] market picking up.”
At The Washington Trust Co., Vice President and Regional Manager of Mortgage Lending Al Grant said total mortgage initiations for the bank by the end of August had already exceeded the total for 2011, and jumbo loans had tracked with conventional.
“Absolutely, with rates as they are, the conforming market has been extremely active, and these interest rates are carrying through to jumbo and creating similar activity,” said Grant.
“A significant portion is refinances, but thankfully we are starting to see some movement in the purchase market with higher-end properties,” Grant said.
In general, loans are considered jumbo when they exceed the $417,000 purchase limit for federal mortgage giants Fannie Mae and Freddie Mac, and require private financing.
Because banks can’t package their jumbo loans with government-conforming mortgage-backed securities, the loans often stay on their books and carry with them more risk, something they have typically offset with higher interest rates.
After taking large losses when the housing bubble burst, banks pulled back from jumbo loans, tightening credit requirements, requiring large down payments and limiting jumbo products to variable-rate mortgages.
Now with housing prices at least stabilizing, lenders are feeling better about making larger loans and offering new jumbo products to entice high-end borrowers.
“Jumbo financing never went away, it was just that the fixed rate was not as attractive and people were doing hybrid ARMs,” said Stephen Tetzner, founding partner of Homestar Mortgage in Providence and president of the Rhode Island Mortgage Bankers Association. “The fixed-rate products have come back. And I would certainly say the spread between a [federal] conforming loan and a jumbo has come down over the last two years.”
Where before lenders might have charged 4 percent for a 30-year, fixed conventional loan and hike it to 5.5 percent for a jumbo loan, now the spread between the two products in some cases has come down to half a percentage point. Some buyers are now securing high-value loans for approximately 4 percent. But as much as banks are now competing for jumbo borrowers, Tetzner said the better rate terms and increase in high-value loans was a result of the nascent rebound in the housing market and not the cause of it.
Through July 31, there were 230 sales of Rhode Island homes worth $600,000 or more, a 24 percent increase from the same point last year, when there were 185 sales of similar homes, according to figures from the Rhode Island Association of Realtors.
Of course, many of those buyers, especially in the $1 million-plus range, don’t need financing, but the increase in sales creates a larger pool of potential jumbo-loan candidates.
So far, smaller community banks and credit unions have been more reluctant to chase large homebuyers than the big banks.
At Pawtucket Credit Union, President and CEO Karl A. Kozak said he has a heavy pipeline of conventional mortgages and refinances, but not many jumbos these days, as his institution has slashed rates for large loans like some banks.
“I think some of the bigger banks are looking for some yield, for something higher,” Kozak said about the jumbo market. “Rates are so low, usually you add on a percentage because [jumbos] are riskier, but now even with adding on it’s still too low.”
Where before the recession jumbo mortgages made up about 20 percent of Pawtucket Credit Union’s home loans, Kozak said now it is closer to 5 percent.
At People’s Credit Union, jumbos have traditionally made up only about 5 percent of mortgages and remain the same now, said Vice President of Lending Lyn Dawley.
“We have competitive prices and options for both fixed and variable, but it is not something we specifically go after or away from,” Dawley said.
At Centreville Bank, Senior Vice President of Lending Lisa Reid said jumbo loans this year are flat from last year, although the bank does have a large-loan promotion that was set to be announced Oct. 1.
BankNewport Senior Vice President of Mortgage Lending Wayne Long said the total dollar value of jumbo loans made by the bank this year is on the same pace as last year and large mortgages remain at just less than 20 percent of all loans.
Long said BankNewport offers a fixed-rate jumbo, but 75 percent of customers looking for a high-value loan choose ARMs for the better rates. •

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